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Shekelle P, Morton SC, Keeler EB. Costs and Benefits of Health Information Technology. Rockville (MD): Agency for Healthcare Research and Quality (US); 2006 Apr. (Evidence Reports/Technology Assessments, No. 132.)

  • This publication is provided for historical reference only and the information may be out of date.

This publication is provided for historical reference only and the information may be out of date.

Cover of Costs and Benefits of Health Information Technology

Costs and Benefits of Health Information Technology.

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The use of health information technology (HIT) has been promoted as having tremendous promise in improving the efficiency, cost-effectiveness, quality, and safety of medical care delivery in our nation's healthcare system. The realization of these benefits is especially important in the context of reports that show five years of consecutive annual double-digit increases in healthcare costs and increases in the numbers of adverse health events.1, 2 At the same time, reports have suggested that 50 percent of all healthcare dollars are wasted on inefficient processes. Legislators and organizational leaders at the federal and state levels have emphasized the need for healthcare to follow the example of many non-healthcare industries, in which implementation of computer information technology has been critical in increasing the accessibility of mission-critical information, automating labor-intensive and inefficient processes, and minimizing human error.

The most important use for HIT may be to help reduce medical errors. This technology-based strategy has proven effective in reducing the effects of human error in industries such as banking and aviation. Clinical HIT systems may make a substantial impact on medical quality and safety by integrating relevant automated decision making and knowledge acquisition tools into the practices of medical providers, thereby reducing errors of omission that result from gaps in provider knowledge or the failure to synthesize and apply that knowledge in clinical practice. These systems, when integrated within larger HIT systems, may improve medical decision making and appropriate use of diagnostic tests and therapeutic agents.

In the ambulatory healthcare environment, the use of HIT offers a variety of benefits. First, it can improve the efficiency and financial health of the practice. For years, many offices have used computerized scheduling and financial systems to streamline office processes by tracking practice productivity and automating reimbursement processes. Second, the use of ambulatory electronic health records (EHRs) also offers an opportunity to monitor and improve clinical quality by improving information access and reducing duplicative documentation. And technology-based “e-prescribing” tools may improve the efficiency and safety of prescribing practices in the outpatient setting just as they have done in the hospital setting. Finally, the widespread adoption of HIT will allow the achievement of system connectivity and information exchange among providers of the same organization, among organizations, and ultimately regionally and nationwide.

However, the majority of medical organizations and providers have been slow to adopt HIT. Recent surveys of computerized physician order entry (CPOE) use show that only 9.6 percent of hospitals have CPOE completely available for use, and only half of these hospitals require use of CPOE.3 In the ambulatory setting, recent estimates place the use of electronic health records at 6 to15 percent of office-based physicians.4, 5 The potential advantages of widespread adoption of HIT in our nation's healthcare system make it vital to examine the scientific evidence that currently supports the relative costs and benefits of HIT, and the barriers to implementing various types of HIT systems across the spectrum of healthcare environments.

A Framework for Considering the Costs and Benefits of Health Information Technology

Private organizations deciding whether to invest in HIT must weigh the costs and benefits of doing so. Although the primary goal of nonprofit healthcare organizations may be to provide high-quality care, these organizations still need to watch the bottom line to survive, which includes understanding the costs of measures designed to improve quality. Such private return-on-investment (ROI) calculations can provide results that are quite different from those of societal cost-benefit analysis, which are often reported in clinical journals.

For example, one study showed that a hospital that installed a computerized reminder system to alert providers when patients were not up-to-date on their immunizations increased pneumococcal vaccine orders by 8 percent. 6 Another study showed that, among the elderly, each $12 vaccination averts $20.27 in hospital costs and increases life expectancy an average of 1.2 days. 7 From society's point of view, the reminder system saves money and improves health, so it is a win-win program. However, from a financial perspective, the hospital has spent money on a system that had no effect on the costs or revenues of current stays because the pneumococcal vaccine is not delivered in the hospital. To benefit from this intervention, the hospital must make a reputation for higher quality and convert it into profits. This is one example of the potential for a mismatch between who pays for and who accrues cost savings from HIT use. A more extreme example would be a hospital's implementation of a HIT intervention that averts future hospitalization. In this case, HIT implementation both costs the hospital money and decreases hospital revenues, even if the HIT implementation has a net cost-savings from a societal (or Medicare) perspective.

Elements of the Business Case

The business case for investing in HIT must consider both financial and nonmonetized 1 consequences. The financial aspect deals with the effect on the organization's bottom line. Any HIT investment has immediate costs in purchase, adaptation to the local organization, and staff training. So the business case for HIT depends on the downstream financial benefits exceeding the immediate costs. Because profits = revenue - costs = (revenue per patient - costs per patient) × (number of patients), long-term profits can come from increases in (profitable) patients, increases in revenues per patient, or decreases in cost per patient. The easiest of these to understand is costs per patient. All organizations benefit from becoming more efficient and reducing the costs of providing particular services. HIT can reduce the waste involved in collecting information and getting it to where it is needed for better decisionmaking. This increase in efficiency can streamline health care and billing processes, and avoid the costs of unnecessary services and of dealing with errors, both in patient care and in billing. Also, working in high quality organizations has some intangible benefits to staff, which may lead to better retention and productivity at equal levels of pay.

However, if the HIT is used to raise the quality of care or change the mix of services provided, the resulting financial costs and benefits depend on how the organization is paid and what expenses it bears. These factors can greatly affect what kind of return on investment is likely and when it will be realized. The next three paragraphs provide some examples.

A reputation for higher quality should increase the demand for an organization's services in a competitive market, but it is difficult to prove that you are better than your competition or better than you used to be. HIT can raise quality and can also generate the statistics to prove you have done so. Perceived higher quality allows organizations to increase market share and to negotiate higher prices from payers whose members demand access to those organizations, even if they have to pay slightly higher premiums to get it. In a competitive fee-for-service environment, greater market share increases revenues and may also permit some economies of scale.

HIT can also be used to increase reimbursable services per patient, such as covered immunizations and exams. HIT pays if it reduces waste, but it reduces profit if it reduces current or downstream services. Hospitals whose payments are set by DRGs (a fixed payment that depends on the diagnosis of the patient but does not vary with actual costs) benefit somewhat from shorter length of stay (although the last days of a hospitalization are the cheapest), but not from reduced readmissions (except those where a Medicare patient bounces back into the hospital before sufficient time lapses post-discharge to qualify the readmission for reimbursement as a “new” episode of care). A hospital also will not benefit financially from interventions that shift care to physicians' practices.

The biggest gains from quality and HIT come when providers are paid by means of a capitated fee system. Under such a system, any investment that reduces the total costs of care for these patients can be recouped, so it pays to reduce unnecessary services and to provide care in the most efficient setting. HIT may help to share the information needed to do so. Such reasoning was behind the Department of Veterans Affairs' (VA's) decision to develop its HIT system. Most published examples of cost-saving quality projects come from health maintenance organizations (HMOs)—for example, better diabetes or heart failure care that keeps patients out of the hospital. Also for HMOs, high quality can offset other undesirable features—such as poor access or amenities—or can justify higher premiums. The gains to HMOs of better care will be more certain when capitation payments are adequately risk adjusted. Without risk adjustment, providing high quality chronic illness care, an area where HIT is particularly useful, may have the unprofitable side effect of attracting more-expensive patients.

Because some of the financial gains from high quality may go to purchasers (employers) rather than providers, particularly in noncapitated, fee-for-service environments, some purchasers have started to pay directly for quality. If the case for HIT were strong enough, insurers might want to subsidize it in part (i.e., based on the insurer's share of the provider's caseload). However, unless an insurer covers most of the patients in a particular health care organization or insurers agree to collaborate, it does not pay one insurer to subsidize HIT for an entire provider or organization because a substantial portion of the cost savings accrue to other payers (the “free rider” problem).

Non-healthcare businesses that are selecting investments might consider only financial return on investment (ROI), but providing health care is a business with an unusual emphasis on nonmonetized goals. The nonmonetized part of the business case includes all nonmonetary arguments that the organization feels will influence the decision to adopt or reject the intervention. Examples include the following:

  • Maintaining credentials
  • Satisfying reporting requirements
  • Satisfying a requirement to do a quality improvement project
  • Avoiding exposure to liability
  • Building goodwill or reputation
  • “Because it's the right thing to do.”

Many of these nonmonetized items have financial aspects. For example, the intervention may reduce the cost of meeting a preexisting reporting requirement. Also, many organizations, particularly nonprofits, have nonfinancial goals—such as providing high quality care—in addition to financial goals. 2

What Is Generalizable Knowledge Regarding Health Information Technology?

In this report, we use the term generalizable knowledge to mean published evidence of the effects of a HIT intervention on costs and benefits that other health care organizations can use to implement HIT and reasonably expect benefits similar to those reported in the original study. Therefore, generalizable knowledge from a study has two components: (1) the internal validity of the study and (2) the utility of the information to others considering implementing HIT. We can illustrate differences in generalizable knowledge by considering some examples.

The simplest example is that of a particular pharmaceutical therapy for patients with a certain condition. In this case, a randomized, placebo-controlled trial of the new pharmaceutical agent would be a study with good internal validity. Because pharmaceuticals are manufactured for consistency in strength and are given according to specified dosing schedules, another health care organization examining the results of such a study could reasonably assume that administration of the new pharmaceutical in the same doses and to patients with similar characteristics would result in benefits similar to those reported in the original study.

A second example would be the assessment of a new surgical therapy. In such a case, the evidence would not come from a randomized, double blind, placebo-controlled trial, since this design is not generally feasible for tests of surgical therapy. Data may come from studies comparing patients randomly assigned to surgical therapy or to an alternate therapy or nonrandomized studies comparing surgically treated patients with historical controls or even case series. As the confidence in the equivalence of the comparison groups at baseline diminishes, the difference in benefit must become greater for the reader to conclude that beneficial effects on outcomes are due to differences in therapy and not other differences between groups at baseline.

Even after accepting that a particular study reports a real difference in outcomes between groups, the healthcare organization or practitioner contemplating offering surgery must consider more factors than when contemplating the prescription of a new pharmaceutical agent. Surgical therapies are not as standardized as pharmaceutical agents, and outcomes depend upon such factors as the skill of the surgical team and hospital. There is no reason to expect that every surgeon and hospital delivers equivalent care the way physicians and patients can expect a standard dose of a pharmaceutical to have equivalent potency. Hence, a study describing the effects of a surgical therapy needs to give more detail than a study describing the effects of a pharmaceutical drug, namely, enough description of the surgeon and hospital that other healthcare organizations or providers can determine whether the reported outcomes are likely to be achieved in their own clinical situation.

When considering HIT evaluation, the situation becomes even more complex. Both the intervention and the subjects of the intervention are qualitatively different in a study of HIT than in a study of a pharmaceutical or surgical intervention. HIT implementation consists of a complex organizational change undertaken to promote quality and efficiency. Studies of organizational change are fundamentally different from studies of medical therapies. Organizational interventions interact with a wide range of organizational system components. To be successful, they must address these components in a locally effective way. Thus, in a sense, these interventions are by nature not widely generalizable, in contrast to studies of narrow interventions such as pharmaceuticals, which aim to identify treatment effectiveness that is operator-independent, or generalizable across settings or providers. This difference has several important consequences. First, randomized controlled trials are not always feasible for assessing organizational change. The risks and benefits of reliance on controlled trials for evidence about interventions involving organizational change has been debated. 8, 9 However, reliance only on randomized clinical trials for evidence of the effect of HIT on costs and outcomes risks restricting the focus to narrow and tightly defined elements of HIT. In many real-world applications, complex organizational change interventions are implemented as a series of steps, with each step dependent on the organizational response to the previous step. Therefore, we judge that generalizable knowledge must and can come from many types of studies. However, we also judge that these studies must report details of the intervention and the organizational characteristics of where the intervention was implemented to allow other organizations to make judgments about the applicability of the results.

We consider the intervention in HIT studies to have at least four components:

  • Technical—including the system components being tested (which may consist of CPOE, clinical charting, or electronic prescribing); the preexisting technology infrastructure (e.g., clinical and financial systems, network); and the existing electronic interfaces and integration.
  • Human factors (machine-person interface)—system usability (e.g., “user-friendliness,” system response time, intuitive user interface, support for workflow processes), support for specialty or context-specific actions (e.g., clinical content, order-sets, and level and acceptability of clinical decision-support).
  • Project management—effecting complex sociotechnical process change around HIT implementation, aligning IT and organizational resources to achieve project milestones, and controllership of IT budgets.
  • Organizational and cultural change, which may include a partnership of medical staff and administrative leadership to govern, align incentives, and mobilize organizational inertia to achieve desired outcomes through process change.

Cutting across all four of these components is effective communication. Most organizational change and IT projects have a strong but unrecognized communication component, which encompasses, among other things, the sharing of vision, values, and information about the components of HIT system selection, as well as its implementation and use.

Without an adequate description of all of these components in a study of HIT costs and benefits, it is difficult for others to be able to infer how, or even whether, they can reproduce the results. Omitting such information would be analogous to omitting the strength or dosing schedule from the report of a study of a pharmaceutical intervention. 3

Similarly, the analogue of the patient in a study of HIT is the organization. No consensus exists regarding what aspects of the organization are most important to report, but some aspects are clearly important. Aspects that have been proposed as important include size, staffing, the organization's prior experience with quality improvement initiatives, processes expected to be influenced by the intervention and how these work currently, and the financial context of the organization. These characteristics may well determine which types of HIT interventions work in a given setting. For this review, we assessed (a) whether studies measured some key organizational characteristics and (b) what those characteristics were. Such characteristics might be considered key organizational demographics, just as gender, age, and illness severity would be considered key demographic characteristics for an efficacy and safety study of a new pharmaceutical.

However, knowing even these characteristics may not be enough to understand why a HIT intervention did or did not work. An organization has to do more than simply buy the software to be successful. It must also invest in adapting the software to the organization, developing new policies and procedures, and training staff. The extent to which the organization is willing and prepared to perform these and other critical additional functions to embed the HIT into all relevant systems determines organizational readiness for change. There is unfortunately little scientific knowledge about which organizational characteristics are essential, and which, like the color of the patient's eyes when assessing the effect of taking a new pill, are unimportant. Thus, even if the description of a successful intervention includes many of the details described above, without information about organizational readiness, readers cannot know whether or not the same intervention is likely to work in their own organization and how long and expensive the transitional process might be.


Nonmonetized consequences are merely costs and benefits that are not expressed in dollar terms. It may be easy to express some of them in dollars but difficult to realize the corresponding cash flows. (For example, the time you spend in traffic may be worth $100/hour, but who is going to pay you for it?) Others may resist expression in dollars.

Nonprofits may explicitly have commitments to provide the highest quality care, but for-profits also share medical ethics and culture to do the best they can for their patients.

However, we recognize that there are barriers to providing this level of specification: For example, prior to that advent of the internet, journals might have been reticent to devote limited space to such descriptions, and the knowledge of what variables need to be included changes over time.


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